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According to the US Food and Drug Administration (FDA), pharmaceutical companies in developing countries are increasingly falsifying data about the quality of their medicines. Moreover, a 2010 Pew survey shows that 54 percent of Americans distrust Indian drugs, and 70 percent distrust Chinese drugs. Although the FDA has stringent rules requiring generic-drug manufacturers to prove that their products work as well as the originals, many overseas manufacturers fail to ensure quality control after receiving approval from the FDA. Indian producers in particular strive to reduce costs by substituting cheaper ingredients or skimping on good manufacturing practice, and often patients and well-informed pharmacists alike will overlook the flaws. As Indian products are increasingly imported to the United States, quality concerns will rise. One possible solution is to enact sanctions against companies that fail to provide quality products.

Key points in this Outlook:

Pharmaceutical companies in developing countries such as India are increasingly exporting potentially dangerous low-cost, off-patent drugs overseas. Some of these lethal products have even slipped past US Food and Drug Administration regulations.

Some Indian drug producers strive to reduce costs by substituting cheaper ingredients or skimping on good manufacturing practices, and US patients and well-informed pharmacists alike may fail to identify the resulting substandard medicines.

To improve drug quality control and minimize the associated risks of substandard medicines, the United States should enact strict sanctions against companies with inadequate records of providing safe and effective drugs.

US citizens have grown increasingly distrustful of low-cost, off-patent pharmaceuticals from emerging markets. Over the past year, the US Food and Drug Administration (FDA) reported that foreign producers of drugs were increasingly falsifying data about the quality of medicines, and the FDA issued six warning letters to companies in Mexico, Poland, the United Arab Emirates, India, and Canada about the quality of active pharmaceutical ingredients, over-the-counter solutions, and injectibles.[1] In a 2010 Pew survey, 54 percent of Americans said they distrusted Indian drugs, and even more (70 percent) reported that they distrusted Chinese drugs. Overseas producers of intermediate ingredients and final products will need to raise their game if they want to maintain access to the largest market in the world.

Ensuring drug production quality is important for at least two reasons. First, even well-informed pharmacists cannot discern the difference between good and bad drugs just by looking at them; patients, therefore, have no chance. Furthermore, some deficiencies may likely go unnoticed even after detailed analysis of the product. Second, if patients cannot identify substandard medicines, then the drug may poison its consumer or, more likely, the drug will fail to treat the relevant disease or condition.

Dr. Harry Lever is a cardiologist at the Cleveland Clinic, and, like all cardiologists, he prescribes diuretics—including furosemide—to help prevent heart failure. “Some of my patients,” recalls Dr. Lever, “were taking the brand medication [Lasix]; then under cost pressure from insurers, I switched them to a generic and they reacted very badly [one patient added ten pounds of weight rapidly]. Only when I switched them back did they recover.”[2]

“In a 2010 Pew survey, 54 percent of Americans said they distrusted Indian drugs, and even more (70 percent) reported that they distrusted Chinese drugs.”

Dr. Lever, and virtually every other practicing physician in America, used to assume that generic drugs were as reliable and effective as their brand-name counterparts. After all, before generics can be sold in the United States, manufacturers must prove to the FDA that their medication works the same as the original drug. Unfortunately, some producers are failing to ensure that the drugs continue to meet those standards after approval.

Dangerous products from developing countries routinely slip through the world’s best drug safety systems in small but nonnegligible amounts. Naturally, Western countries have tried to regulate the problem away, but these efforts often fail. This is largely because there is no such demand for Western safety concerns in emerging markets. Producers exporting to Western markets do not always pay close enough attention to quality control, and mistakes happen. Other producers, notably from India, have also gotten better at intentionally circumventing Western regulations. Even those making high-profile brands under the most scrutiny can get away with cutting corners.

Indians Shrug at Western Claims

Facing low demand for quality control, a weak regulator, and significant competition, Indian producers have a strong incentive to reduce costs by substituting cheaper ingredients or skimping on good manufacturing practice. As a result, Indian drugs have a higher risk of being substandard than those made in United States. Indian companies and regulators simply deny there is any difference in product quality between their products and those made in the West. Nevertheless, the unspoken but widely believed assumption is that US companies will spot any problems with imported ingredients, but when an inferior (allergenic) product was substituted for raw heparin by a Chinese producer, it fooled routine tests at the US manufacturer. Only after 149 Americans died was a new complex test developed to screen the counterfeit. Alas, products made by US companies with ingredients from India, China, or other emerging markets also pose risks.

The FDA cannot regulate the world, although it tries to regulate critical parts of it. The FDA maintains offices in 15 locations worldwide that collaborate with local governments, manufacturers, and organizations to attempt to regulate product quality. These offices and their 800 inspectors oversee foreign factory inspections, collaborate with local regulatory agencies, train managers to be knowledgeable about FDA regulatory requirements for imported products, and target imported products for testing. If any product undergoes a relevant change, then it can no longer be imported unless inspected again.[3] Moreover, according to the Federal Food, Drug, and Cosmetic Act, approval of foreign drugs must be product- and manufacturer-specific.

The FDA’s foreign inspections require authorization from the relevant government on a nation-by-nation basis. Inspections last from three to fourteen days, and some nations accommodate the investigations willingly to improve their export market for products requiring FDA approval.[4] In addition, the FDA has confidentiality arrangements with the European Union, the World Health Organization, and 41 foreign agencies in 20 nations around the world to share nonpublic information about imported products.

However, these efforts frequently fall short. FDA monitoring in India or China—which are the biggest emerging-market producers and which have two and three offices, respectively—stretches resources. At best, the agency shows the flag once a decade, as compared with every two years for US-based producers. This is partly because FDA staff must first volunteer to undertake inspections abroad, and traveling to India and China is tiring and stressful. Unlike in the United States, inspectors are not given unfettered access to production facilities, so their inspection reports are less certain.

Moreover, if a plant manager is given several days’ notice of an FDA visit, some problems can be covered up. Even if a few deficient factories are temporarily barred from selling their products to the United States, very little can effectively be done by the FDA to correct overall failings. To avoid shortages, noninspected sites are assumed to be working correctly, which is true for many—even most—but not all.

The FDA also does very little surveillance of products already on the US market. It is assumed that once a manufacturer has attained the required standard, it will be maintained. The main line of defense against substandard medicines is the adverse-effects reporting system administered by drug companies in the end market, which identifies problems after they have caused harm. And it is a system that Dr. Lever tells me he finds slow moving, since he has “repeatedly complained about certain products and seen no action.”

Mistrust of Emerging-Market Regulators

In November, the FDA reported that the Gurgaon, India-based Ranbaxy Laboratories Limited had issued a proactive voluntary recall of its anticholesterol drug atorvastatin because of possible glass particles in the medicine. Though the FDA had not received any reports of Americans being injured at the time of the recall, the quality of Ranbaxy’s drugs has been a hot topic in the pharmaceutical industry for some time. Ranbaxy is one of the largest and most respected Indian drug companies, and the FDA granted it the sole generic license for the manufacture of generic Lipitor (atorvastatin) beginning in November 2011. Lipitor is the most valuable medicine by sales in the world, therefore it was a coup for Ranbaxy to be awarded the license.

US-based Mylan Pharmaceuticals filed a suit against the FDA in 2011on the grounds that Ranbaxy had committed manufacturing violations at two factories in India, thus voiding its application to become the exclusive generic alternative.[5] Mylan criticized the FDA’s perceived hesitancy in addressing these concerns by stating, “The FDA’s indecision is depriving millions of Lipitor patients access to lower cost generic Lipitor. It’s costing the public billions of dollars in savings, and costing generic manufacturers billions of dollars in lost sales.”[6]

It was surprising that the FDA was prepared to overlook Ranbaxy’s drug quality problems. In 2005, whistleblowers from Ranbaxy alerted the FDA that members of Ranbaxy’s staff were deliberately cutting corners in producing HIV medication to be bought with US taxpayer funds. The FDA and US Department of Justice identified two questionable Ranbaxy plants and 30 suspect medications, yet only restricted their US-bound sales in 2010. Fortune Magazine and other media outlets raised concerns that the market for generic Lipitor was too important to be left to an Indian manufacturer with dubious quality control. These concerns were obviously justified considering that Ranbaxy is once again unable to sell its product on the US market.

“In November, the FDA reported that the Gurgaon, India-based Ranbaxy Laboratories Limited had issued a proactive voluntary recall of its anticholesterol drug atorvastatin because of possible glass particles in the medicine.”

All producers occasionally have problems with quality. Johnson & Johnson famously had major problems with its production of Tylenol and other medications in 2010. However, the FDA is widely respected, and companies know that they will face heavy fines and even larger losses in market share if they do not address quality. India’s drug regulators have not generated such respect, and, as such, Indian companies are less likely to be pressured to act responsibly.

On May 9, 2012, the Indian Government’s Parliamentary Standing Committee on Health and Family Welfare (PSCHFW) presented a 118-page evaluation of the Central Drugs Standard Control Organization (CDSCO), the government’s federal drug regulator. PSCHFW eviscerated the CDSCO for corruption, and concluded that many apparently independent expert health opinions about the safety of drug products “were actually written by the invisible hands of drug manufacturers.”[7] Local media further alleged that CDSCO regulators got their posts based on who they knew, rather than their merit or qualifications.

Some high-level officials within the Indian pharmaceutical industry immediately issued denials.[8] The president of drug company Cipla boldly stated that “no company breaks the law,” and Sun Pharmaceutical Industries said that it strongly denied any “wrongdoing.”[9] Ranbaxy’s former president Ramesh Adige was less confrontational and more optimistic that CDSCO would be able to prevent future problems.

The day after the report was released, Indian Ministry of Health & Family Welfare Minister P.K. Pradhan denied that the entire regulatory “system was rotten,” and promised that specific failures would be investigated and “remedial action” taken. “We will be streamlining CDSCO and make the procedures more transparent,” he concluded.[10] The Ministry of Health & Family Welfare then established a three-member committee to investigate the PSCHFW findings. Calcutta’s Telegraph news-paper immediately noted that the committee did not have “representatives of civil society” with a working knowledge of the drug industry.[11]

While the committee could positively affect health ministry policies, its recommendations are unlikely to have an effect without better underlying business ethics and reporting of ethics violations. For instance, whistleblowers were critical to recent successful US prosecutions of major pharmaceutical companies such as GlaxoSmithKline (GSK), which was fined $1.5 billion for inappropriate drug sales and other offences. Three years ago, CDSCO established a similar and reasonable whistleblower policy, though not a single case has resulted from this policy. CDSCO recently broadened the reward system to include Indian pharmacists so that they could reveal on those selling fake or substandard medicines; still, there has been no obvious response.

This is not surprising. Companies in Europe and the United States have taken decades to change unethical behavior. As the GSK case reveals, individuals at all levels of authority can still act immorally. In spite of these possibilities, Western codes of conduct minimize manipulation and fraud. The FDA may be slow to approve new medicines, but no one accuses it of corruption. Its counterparts in India, China, and Russia do not share this reputation.

“The crux of the issue is accelerating the improvement of systems of oversight and information generation, and hence ensuring consistent quality of products.”The crux of the issue is accelerating the improvement of systems of oversight and information generation, and hence ensuring consistent product quality, notably in India, which is the source of more finished products exported to the United States than any other emerging market. Addressing this problem will require changing the cultural norms surrounding drug safety.

Ranbaxy: Better than Most Drug Companies

When I investigated the Ranbaxy HIV drug problem (I was contacted by a whistleblower in 2004), nearly everyone I spoke with thought it quite likely that some midlevel managers, possibly under cost pressure imposed by senior management, would break quality-control rules to hit their targets. The standards that appeared to be ingrained in senior management were not always found in managers further down the chain.

One way to accelerate the development of quality-management systems is through greater integration of the practices of advanced countries’ firms into Indian firms. Ranbaxy was recently bought by Japanese drug firm Daiichi-Sankyo so technology transfer and changes in management culture might improve the consistency of its products’ quality. Other mergers and acquisitions are also occurring, but they are slowed by the negative environment for inward investment. And nothing halts foreign investment by drug companies faster than uncertain intellectual property rules.

Section 3(d) and Patent Abuse in India

In 2006, the Indian Patent Office refused to grant Swiss drug company Novartis a license for its blockbuster leukemia drug Glivec (imatinib mesylate). This action confirmed suspicion among Western policy experts that patent law was applied arbitrarily to support Indian interests. One of the most debated pieces of drug legislation in India is Indian Patent Act Section 3(d). This clause is designed to prevent “evergreening,” in which minor changes to existing drugs are used by drug companies to get valuable patent extensions.

While Section 3(b) is a reasonable idea in practice, India’s patent office has used it to deny patents for obviously beneficial drugs. Glivec is a salt variant (mesylate) of a previously known compound (imatinib). Only by making the salt (beta polymorph) version could a patient more easily absorb the product. Glivec is a superior product to the nonsalt variant, and most people would not view this modification as evergreening.

“Overturning Section 3(d) of the Indian Patent Law would immediately increase Western investment in Indian companies, and probably accelerate quality control.”

However, the Indian Patent Office denied Novartis a patent, apparently under pressure from several Indian companies that wanted to produce the valuable medicine (most do not produce the beta polymorph version of the salt because it is harder to make, and hence less effective). Novartis appealed the ruling, and the case went all the way to the Indian Supreme Court. The court heard final evidence for the case in December 2012, and a decision is expected before the spring. Few people expect Novartis to win, and even if it does, it would only just begin the discussion of changing Section 3(d). Drug companies such as Roche, Bayer, Pfizer, and Gilead Sciences Inc., to name just the larger multinational players, have also had patents unfairly denied, and most are on appeal.

These challenges are significant because they increase antagonism between Western firms and possible domestic Indian partners, some of which are making short-run profits producing copies of Western products. Even if Novartis wins its appeal, the popular sentiment in India is against changing Section 3(d). Immediate access to cheaper medicine, even of uncertain quality, trumps any concern about long-run impacts.

Novartis had been intending to build research and production infrastructure in India, but because of the Glivec decision, it decided against that investment. Novartis continues to work in India and may invest in infrastructure again in the future. Though other companies have invested, many are sitting on the sidelines. The law has suppressed India’s level of foreign direct investment and promoted distrust between major domestic and foreign players. Most importantly, quality-control standards have not risen as fast as they would have with that investment.

It is ironic that many of the larger Indian companies, which routinely copy Western medicines, often object when smaller Indian companies make poor-quality versions of larger companies’ own products. If, for example, an Indian railway tender is awarded to a low bidder with known quality problems, larger companies will often privately complain to the authorities about quality problems, and even leak damaging information about the winning bidder to the press.[12] But these objections appear isolated and are merely devices for undercutting an opponent. They never represent a principled stand for higher quality.

Overturning Section 3(d) of the Indian Patent Law would immediately increase Western investment in Indian companies, and probably accelerate quality control. It might then even embolden Indian companies making good quality generics to oppose local companies that make poorer ones as a matter of principle—not simply expediency. Overturning Section 3(d) would be a start, but the Indian government needs to do far more than this to ensure better quality products from the firms it oversees.

Pharmaceutical Product Quality in India

Unfortunately, India’s health sector investment has never been a priority, and the regulatory and insurance framework has not kept pace as the pharmaceutical industry has grown. Only 11 percent of Indians have health insurance, and they are mostly professionals who are more able to buy drugs out of pocket. For the remaining 89 percent without insurance, all drugs are bought out of pocket. Thus, the price of drugs is keenly monitored, and pressure is applied to keep prices low—probably the lowest in the world. Making drugs cheap enough to increase access to them is an admirable goal, but patients cannot routinely afford medication for diseases with long-term treatment regimens such as tuberculosis (TB), and hence skip treatment. India has the worst drug-resistant TB in the world.

Though the Indian government has promised cheap access to TB drugs, without a budget increase, it will only be able to afford products from potentially shoddy producers. As one local health expert (who did not want to be identified for fear of a backlash from Indian companies) said to me, “the health of the average Indian is at stake” because of these products. “In India, it is viewed as a low, or just a Western, priority to worry about quality,” he concluded. In particular, he suggested that immunosuppressants and oncology products are not made well by mid-ranking Indian companies, and can be lethal. “Only by improving quality-control systems in production will quality improve. You can’t simply test after the fact and assume you’ll find problems,” he said.

Conclusion

As an increasing amount of Indian products end up in the US market, quality concerns will rise. Because of corruption and lack of authority within domestic regulators and the FDA, respectively, the Indian companies themselves are almost solely responsible for performance. As such, and for the vast majority of the time, the top Indian companies are to be commended for delivering high-quality products with no effective governmental oversight. In that sense, their products are of incredibly good value. Their self-regulation is a classic reason why markets tend to work, with better products supplanting weaker ones. But it is hard for consumers to spot poor-quality drugs—in the case of asymmetric information, where the producer knows far more about the product than the consumer can ever know, there is often reason for regulation.

As such, it is ironic that so many health advocates, who are often left-leaning and antimarket, are the strongest champions of Indian drugs, when they would be appalled if US or European companies were subjected to such trivial oversight. The question remains, what added pressure can be applied to emerging-market producers with poor domestic oversight that will ensure consistent quality? The most obvious move is to enact sanctions against companies that fail to provide quality products. For donor aid contracts, this might entail a fine with injunctive threats to stop any company selling bad products from tendering in the future. Similar sanctions could apply to US importers if they sell poor-quality drugs to clinics and hospitals. Though private action against companies might assist in this matter, no meaningful deterrent can be provided without the threat of a closed market to offending companies, such as in the Ranbaxy case.

As the heparin case and other cases show, pharmaceutical purchasers may not be able to find extant problems with a product because comprehensive tests of the products are not always feasible. As quality problems become more obvious, US companies that derive all their ingredients from Western nations may present these as superior (less inherently risky) products and charge a premium. Such a divergence has already occurred in the food market.

For example, one may not know which exact cow produced a given gallon of milk, but one often knows the farm or the state from which the milk originates, especially if the product is expensive and from an organically reared cow. Similarly, consumers could demand greater knowledge of the drugs they buy, and some will undoubtedly want drugs made with fewer or no ingredients from India or China. It is likely that the best Indian companies, if they started to lose business and revenue, would establish their own independently verified quality-control systems and allow—even demand—that the FDA have unfettered access, which would ensure Western purchasers were satisfied with regulatory oversight.

At the moment, the market is not providing consumers with enough information about drug quality. Since regulators have proven less than capable of servicing a differentiated market, the burden falls on companies to provide and consumers to demand a new, multitiered market where very cheap drugs continue to exist, but without the provenance of more expensive varieties.